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July 11, 2005

Here’s one for any fellow countrymen who intend to work with companies in the United States.

Live in Canada? Run a small web design studio or development business? Looking to work with a company based in the US? Got hit with IRS paperwork? There’s good news.

First and foremost though, the legal stuff: I am not a lawyer, this can not be construed as legal advice, and I can’t guarantee the accuracy of these statements. This is for informational purposes only. You’ll want to consult with a lawyer who specializes in US tax law to analyze your own situation, as there are bound to be various specifics that need the attention of a professional. If printed, this article must be printed in its entirety and feature this notice.

As the owner of a small Canadian design studio, I frequently take on contracts with US-based businesses. The flow of money across the border is obviously important to the governments involved, as it’s taxable income. I’ve consulted with US tax lawyers on this issue to make sure I’m on solid legal ground, and I’m simply passing on what I’ve been able to interpret about what I found out during these consultations. Again, it’s simply my interpretation, not genuine legal advice. (Yes, it’s tricky to know when to quit with the disclaimers…)

When initiating a new contract, the foreign company I’m working with usually passes along paperwork that needs to be completed before any payment can be issued. The larger the company, the more likely it is to happen. The paperwork usually consists of an IRS form W8-BEN (PDF link), along with any internal forms their accounting department requires. The latter are for the company’s own records, and a necessary hoop to jump through. What interests us here is the W8-BEN. This is where it gets tricky.

The accounting department is usually working on the basis of local tax laws, whereas in your case, if you’re working on Canadian soil, those laws may not apply. (The laws are different for Canadian citizens working on US soil, but I still have yet to figure out how THAT works.) The important point to note here is that the international US-Canada tax treaty supersedes any local law where there’s overlap or potential conflict. Getting your hands on a copy, and then deciphering it, though, is no easy task. Again for information purposes only, here’s an online version which may or may not be accurate. If you can find all the articles that apply to you, and then actually understand their implications, you’ll be fine. Unfortunately, for pretty much all of us who didn’t study law in school, doing so means hiring a lawyer.

Essentially, the Article relevant to the situation in which you and I find ourselves is Article VII. When working for hire, you’re on the hook for paying taxes only to the country in which you reside. Sorry, that does mean your US income is taxable by the Canadian government just the same as any Canadian income, and you are responsible for filing your own return. But on the bright side, no, you don’t have to pay tax on it twice. Canada has tax jurisdiction, and you are only accountable to the Canada Revenue Agency. (And if you have a GST number you probably know this already, but it’s relevant to point out here that you shouldn’t be charging GST when billing foreign companies.)

So what about the paperwork? You aren’t required to do it. But that comes with a caveat: convincing the foreign accounting department of that may be difficult, if they don’t have anyone on staff familiar with the tax treaty. This article may provide you with a bit of negotiating power when dealing with them. Though you don’t need to, you may find it less burdensome simply to keep a completed W8-BEN on hand and send it in when requested, instead of arguing out the specifics every time. There’s no real harm in doing so, other than the fact that a foreign government agency has a clear trail of your income. (And considering your clients will be reporting the payments, they probably do anyway.)

The W8-BEN does exist for a reason though; the case we’ve been looking at here depends on a few things:

  • You must reside in, and perform all services in Canada.
  • The compensation is received strictly for work for hire, and not for other services, or forms of royalties, capital gains, or other types of income.

In the case of other types of income (royalties became relevant to me last year, for example), the W8-BEN is a way to claim additional treaty benefits. In very few instances will you actually have to pay the IRS anything, but there are various other reasons why you may need to fill out the form to make sure a percentage of your income isn’t withheld.

When a W8-BEN is required, unfortunately you first need to apply for a US taxpayer number, whether that’s an Employer Identification Number (EIN) or an Individual Taxpayer Identification Number (ITIN). If you own a business, you have the ability to call the IRS directly and get an EIN for your business; expect the number to arrive by mail within a month. If you apply for an ITIN, the wait will take a lot longer and you must visit a US consulate (or visit the country itself) to have your application notarized by an approved US notary. Considering the narrow window the notary was available at my own local consulate (M,W,F, 1:30-4:30pm only) and the long wait for approval, I would highly recommend trying for an EIN first if at all possible.

I’ll leave you with some parting advice. If you think you might find yourself in a situation where any of this advice is relevant, consult with a tax lawyer now. Bring a laptop or a notepad and write down everything you possibly can during that consultation. The time and effort you save will more than offset the few hundred dollars an hour; researching this information on your own will not be worth the effort, and misunderstandings can lead to litigation, even if they’re honest mistakes.

Dave S. says:
July 11, 10h

**** DISCLAIMER ****

Any comments below are solely the opinion of the poster, and can not be construed as legal advice.

**** /DISCLAIMER ****

July 11, 11h

I think you can file for an EIN online as well and get it in less than a week. However, I’m not sure this works for Canadians… Perhaps just US Companies.

July 11, 12h

I think everyone is too scared to post comments

Thanks for the advice.

Dave S. says:
July 12, 01h

Er, yes, I did indeed mean consulate. Thanks for pointing that out.

July 12, 02h

OMG - and I thought EU VAT regulations were complex…

tre says:
July 12, 09h

i think dave’s legal counsel did a number on him. he’s spewing legal-speak out of every orifice. ;) however, cheers for the tax tip for the canucks.

July 12, 10h

Thanks for the article. Being a Canadian I appreciate the advice from experience and I should be seeking legal advice once the time comes.

Isaac Lin says:
July 12, 12h

Just to clarify, did you mean that you have to visit a US consulate to get an ITIN? (The embassy is fine for those living in Ottawa, but it would be a big pain for everyone else.)